Brown mark II

The resignation of Peter Hain could have been the last straw for a stumbling Prime Minister. Instead, it has been a turning point. His new Downing Street team is being praised for its adroit handling of the crisis - and his latest cabinet appointments have at last signalled peace between New Labour's warring factions. Nicholas Watt reports

As an admirer of Gordon Brown, one veteran minister knows the Prime Minister can be an intense soul who demands complete loyalty from allies. Last Thursday afternoon, however, as Westminster digested the news of Peter Hain's resignation from the cabinet, even ardent loyalists were in despair.

'I really am depressed, we just don't look or feel like a government any more,' the minister complained to The Observer. 'Gordon had a great start in the summer but we haven't recovered our momentum after the mess of the autumn. And now we have had our first resignation from his cabinet.'

The outburst by the minister, who knows that rules akin to the Mafia code of omertà used to prevail within the Brown circle, showed the depth of concern at the highest levels of the Labour Party last week about one alarming possibility: that the resignation of Peter Hain would mark the moment when the Prime Minister went into terminal decline.

Grand plans to relaunch his premiership with a series of 'tough decisions', first outlined to The Observer days into the new year, were in danger of falling apart as Labour endured the unprecedented spectacle of a cabinet minister standing down after police were called in to examine his political finances.

The Tories, many of whom rushed through the Palace of Westminster with looks of sheer joy on their faces as news spread of the resignation, tried to ram home their advantage by suggesting that Hain was not alone. Chris Grayling, Hain's counterpart as shadow Work and Pensions Secretary, said: 'Gordon Brown came to office promising a cleaner approach to British politics but Labour is the subject of two police inquiries in two months.'

Conservative excitement - and Labour gloom - was heightened by the timing. Minutes before Hain resigned at 12.21pm on Thursday, Chancellor Alistair Darling had endured an uncomfortable ride in the Commons after he announced a partial U-turn on plans to impose an increase of up to 80 per cent in capital gains tax on some businesses.

It was Darling's second difficult appearance of the week. On Monday he unveiled a £25bn rescue package for Northern Rock, guaranteeing that the taxpayer will still have to underwrite the troubled bank for some years to come. It was the near-collapse of Northern Rock in September that helped end the Brown honeymoon, leading to the loss of momentum from which Brown is still struggling to recover.

By the end of the week, the political picture appeared to be more nuanced than the despairing minister had feared. The resignation of Hain, followed swiftly by a cabinet reshuffle in which Brown promoted young talent, appeared not to have inflicted lasting damage on the government as most media attention focused on the rising stars.

'Clearly it is a setback,' said James Purnell, the most senior of those young stars, who has succeeded Hain as Work and Pensions Secretary. 'But Peter did exactly the right thing.'

Brown will look forward this week as he presses ahead with more of his 'tough decisions' to equip Britain for the 21st century, including a warm embrace of radical plans for welfare reform, according to Purnell. 'The Labour Party is the party of change or it is nothing,' he said. 'Why do people round the world look to Britain? Because of our ability to reform.'

Downing Street hopes Hain's swift departure means Brown will not be distracted from his mission this week - unlike Tony Blair, who faced long-drawn-out recriminations over Peter Mandelson's various resignations and comebacks. A combination of luck and brutal political calculation have helped bolster their optimism.

In the space of 13 minutes shortly after noon on Thursday, Hain earnt himself a small place in the history books by executing one of the swiftest political resignations in recent times. At 12.08pm, the Electoral Commission announced it was passing to the police a file about donations to Hain's campaign for Labour's deputy leadership. Within 13 minutes, at 12.21pm, Hain had resigned from his two cabinet posts as Work and Pensions Secretary and Wales Secretary.

He telephoned Brown at 11.30am to tip him off about the commission's imminent announcement and to inform the Prime Minister that he had no choice but to resign. Brown made no attempt to persuade him to stay; both men knew that Hain's cabinet career was doomed the moment the police were called in to investigate the late declarations of £103,000 in donations to his unsuccessful campaign for the deputy leadership.

The abrupt departure prompted little outpouring of grief on the Labour benches. 'Peter was a good minister but he was never really embraced by Labour,' said one minister who counted himself as an admirer but who never forgot Hain's roots in the Young Liberals.

Hain's semi-detached relationship with his party played some role in dissipating the fallout from his resignation. But the most significant mitigating factor was a careful operation mounted by Downing Street staff to shield the government from any fallout after Hain's mid-January admission about the delayed declaration of donations.

The operation was not without its hiccups; Number 10 officials still wince at Brown's description of Hain's mistake as 'an incompetence'. They also know that Brown faces accusations of indecision after refusing to act straightaway when Hain admitted to serious oversights in his declarations. But senior figures believe this criticism is a price worth paying, according to one minister, who explained the simple calculations that dictated Number 10's conduct over the last two weeks.

'Peter was politically dead the moment he admitted failing to declare so many donations,' the minister said. 'But Number 10 couldn't do anything until he was reprimanded by an independent authority or the police were called in. If they had moved before that had happened, then Harriet [Harman, the deputy Labour leader] and Wendy [Alexander, Labour's leader in Scotland who also made funding mistakes] would have been in difficulty. Now that Peter is facing a police investigation, there is a lot less pressure on them.'

Such claims will be dismissed by the Tories as at best a preposterous attempt by Labour to spin itself out of a messy corner, or at worst a sign that Brown is still a 'machine politician' who calculates his moves in the manner of an obsessive chess player. But Labour figures who are no fans of Brown thought the resignation had been handled well and said that a revamped team of senior party officials had passed their first test with flying colours.

As the former managing director of the once-ailing cable company NTL, Stephen Carter knows about dealing with troublesome organisations. But the affable Scot would have had little inkling of the baptism of fire he would experience when he arrived in Downing Street as Brown's new strategy chief on 14 January: just days before Carter moved into his ground floor office in Number 10, Hain owned up to his funding mistakes.

The appointment of Carter was the first in a series of personnel changes in Downing Street as Brown tries to improve his operation after last year's fiasco of the non-election announcement. The changes were completed on the day before Hain's resignation with the return from the Cabinet Office of Jeremy Heywood, who becomes Number 10's new Permanent Secretary. Heywood, originally a Treasury official, is revered in senior ministerial circles for the skilful way he handled Blair-Brown relations when he served as Blair's principal private secretary.

Labour critics of Brown regard the shake-up as one of his most significant moves since he became Prime Minister. They see it as an admission that his original plan - to move his Treasury operation lock stock and barrel down the road - was not working.

This underlines a wider political point: that Brown has accepted that life as Prime Minister is completely different from his more predictable life as Chancellor. Supporters of Blair felt Brown's criticisms of his predecessor sometimes showed he failed to appreciate the endless pressure faced by a premier.

Cabinet ministers who agitated for the changes were concerned that key decisions, such as the election fiasco, had been made in a small inner circle of Brown supporters. Carter will now take charge of those sorts of discussions.

One well-placed MP said: 'The changes in Downing Street really are very significant. Gordon was clearly thrown by the election mess and realised he had to change. Recent announcements, calling for individual budgets for social care, show that he is not just embracing personnel changes: he has wholeheartedly embraced reform.'

With a reforming drive at the heart of his mission, it came as no surprise that Brown should use his first forced cabinet reshuffle to promote some under-40s - nor that the most senior post should go to a man - Purnell - once seen as a Blairite to his fingertips. The appointments were taken on the same day that Hain resigned, but the youngsters had to wait, as a pre-planned video conference with George Bush between 2pm and 3pm went ahead as planned. 'That was a critical moment in the reshuffle, but the video conference went ahead,' one source said.

'Do you know that this department is in charge of a budget that is bigger than the Portuguese economy?' asked James Purnell, the new, 37-year-old, Secretary of State for Work and Pensions.

Looking remarkably relaxed for someone who has just been placed in charge of a £132bn budget - and a department that finishes off the careers of ministers who fail to master its complexities - Purnell believes the government is brimming with ideas for radical reforms.

To illustrate his point, he made an extraordinary claim to try to dismiss David Cameron's efforts to claim to the legacy of his former boss, Tony Blair. 'Gordon Brown is clearly the heir to Blair,' Purnell said. 'They created New Labour together and he is building on the reforms of the last 10 years - but there is unfinished business ... You only need to look at his health speech, or what we're doing on Monday [on welfare], to see that is absolutely where we are.'

With his intimate knowledge of the creation of New Labour - he started working for Blair as a student in 1989 - Purnell said it was absurd to characterise Brown as an opponent of reform. 'I was there when he and Tony were inventing New Labour together. He has always been central to it ... from Bank of England independence to [the] Private Finance Initiative. Where did Welfare to Work come from? It was, if anything, more Gordon than Tony.'

But he insisted a new era had started. 'There aren't Blairites and Brownites any more,' he said.

Purnell put the Tories, who had hoped to capture the mantle of welfare reform, on notice that Blair's initiatives may end up looking a little timid when Brown announces the next phase of welfare reform tomorrow.

A ground-breaking report by David Freud, which was dismissed by the Treasury last year, will be implemented and taken even further as voluntary groups and companies are given greater opportunities to help the long-term unemployed back into work.

Using the sort of language that once sparked wars between the Blair and Brown camps, Purnell declared that the government had no ideological preference for any one of the three sectors - private, public and voluntary.

As the son and grandson of teachers, Purnell said: 'I grew up in a family with the public service ethos to make people's lives better. Progressives want to make the world a better place. If people can do that using the private sector, the public sector, or the voluntary, why not? We are ideologically neutral between all three, we want to use all three.'

The clear language of Purnell, who worked in Blair's Number 10 Policy Unit before resigning to fight the 2001 election, indicates the confidence about Brown's intentions now felt by ministers who were once seen as Blairites. 'The key is, you continue what has worked for the last 10 years. But the whole point of modernisation is you keep an open mind about the means by which you achieve things,' he said. 'The key thing in politics is not getting stuck into mistaking a means for an end. The ends are very clear. But the way in which you achieve that changes for each new generation.'

With other Blairites outside the government impressed by the new tone emanating from Downing Street, Purnell believes that Labour is now in a strong position to stamp on David Cameron's attempts to seize the Blair mantle.

'David Cameron has totally failed to demonstrate he is able to [be the heir to Blair],' he said. 'Two problems I have with David Cameron are, first, that he is a conservative with a small 'c'. He is not prepared to make the big changes which are necessary. They have decided to emulate the communication strategy of Labour in the 1990s, but they have failed to emulate the policy strategy. Secondly, he is still stuck in the old elitist ways of the Conservative party - basically thinking that policy should be about helping the top 20 per cent, 10 per cent, of society and leaving the rest to sink or swim.'

As a junior architect of New Labour, Purnell believes Cameron has made a key error in trying to ape Blair's and Brown's creation. 'The mistake they make [is] they think [New Labour] was about "you keep the policies the same, but you present them in a more palatable way". But actually it was "you rethink fundamentally your policy approach - and then you communicate it". If you look at their policy framework, it is the same policies but in a different language.'

Having prospered as Labour finally made it into office with a landslide victory in 1997, Purnell's political generation is often criticised for failing to appreciate that the electoral battle is usually more evenly matched. But he admitted that the government has gone through a 'difficult' patch and that British politics is now a neck-and-neck race. This was illustrated by yesterday's Guardian/ICM poll, which gave the Tories a two-point lead over Labour - 37 to 35 per cent.

Purnell said: 'For a while, the political weather was suspended, partly because of the weakness of the Conservative party and partly because New Labour was a genuinely new approach. We are just simply back into normal political weather, where you win elections [and] you make changes that can sometimes affect the polls.

'But if you make the right changes and you can show progress, and you can show the forward direction that people think is right for the country, then that is the way you win the next election.' Such confidence may come as a reassurance to Labour's older generation, who had feared the Hain resignation marked a perilous moment. But maybe the veterans will always grumble: Purnell is one of five cabinet ministers under 40 whose rapid ascents are looked on with envy.